When Patrick Collins Jr. was searching for ways to improve his book, he decided to launch his own RIA. In 2004, the year he left, Collins was an employee of Merrill Lynch with five years experience under his belt. He had only about $30 million in assets under management in his last year with the firm, a sum that many experts say isn't enough to go it alone. What also makes his choice interesting is that his book, with about 60 percent of his assets in the fee-based model, would have been attractive to many independent broker/dealers in search of reps with recurring revenue.
But Collins decided to take the plunge simply because he wanted to run his own business his way — and he didn't want to share revenue he generated with the owners and shareholders of a large firm. So, he launched Greenspring Wealth Management, a registered investment advisory (RIA) firm in Towson, Md. “In the first year of switching, I saw a 50 percent increase in my compensation,” he says. “Now it's a 100 percent increase.”
Collins' experience isn't unique. In fact, Registered Rep.'s 2007 annual advisor compensation survey revealed something relatively surprising: Survey respondents who described their job function as “practice principal or owner” (in short, advisors running their own RIAs or independent practices) averaged a higher compensation in 2006 than “senior advisors” (an experienced wirehouse rep).
More specifically, practice principals and owners had an average compensation of $265,874 while senior advisors averaged $235,590 in the same year. That may not sound like that much of a difference — about $30,000 — but the sum for senior advisors includes deferred compensation and other bonuses. Put simply: Compensation is greater in the independent/RIA sector — as long as the advisor owns the practice. This may surprise some, since it's true that corner-office FAs at wirehouses, such as Merrill Lynch and Smith Barney, do in fact post some gaudy assets under management and gross production numbers. It just goes to show that owning your own business — with its attendant small-business hassles and risks — may put you into rarefied territory.
And while Collins' book is smaller than that of the average corner-office advisor, he is still benefiting from the fact that his RIA's profits flow down to him and his partner, Joshua Itzoe. “At Merrill, if there's a 20-cent profit for every dollar, those 20 cents don't trickle down to advisors. But [as a practice principal] I can keep whatever profit comes in — in addition to my salary,” he explains.
Itzoe, who joined the firm in mid-2005 after leaving Morgan Stanley, says as an owner of a firm, the key is overhead cost-control. He estimates that 40 percent of the firm's revenues are allocated to the partners' compensation, another 40 percent to overhead costs and the remaining 15 percent are profit that the partners can choose to keep or re-invest in the firm. Of course, those numbers can vary year to year. For example, Itzoe says that the firm expects higher revenues in 2007, so overhead costs will probably fall to 35 percent of revenues.
Then again, there are some areas of a financial advisory practice where cutting costs is not an option. “Technology is something you can't cut corners on. Computers, a server, copier, scanner, phone system — it's all stuff you need to run a business,” Itzoe says. Software is another must-have. Itzoe says he and his partner spend $10,000 each year on software licenses. “We run our business off that software and have to pay for it. Our portfolio-management software is probably the most important software we use,” he adds.
The result? “I'm probably making twice as much money as in my last year of production at Morgan Stanley,” Itzoe says, who declined to provide his specific take-home pay number.
Barnaby Grist, managing director of strategic business development at Schwab Institutional, argues that average compensation figures for wirehouse and independent advisors (regardless of ownership status) are still very close. Average compensation for wirehouse reps beats out average compensation for all independent and dually-registered reps by just 11 percent and 16 percent, respectively — again even after wirehouse reps collect their deferred comp and bonuses. But then, independents and dually-registered reps typically earn far higher payouts.
“Traditionally, the belief was that the independent side was for reject advisors — the ones who couldn't make it at a wirehouse,” Grist says. But the Registered Rep. survey and Schwab's own research tell a different story. Again, if you don't own, it's tough to compete with the take-home pay of advisors working at the wirehouses, which have been offering attractive packages to reps with high-net-worth clients and recurring revenue streams.
The Comfort of the Wirehouse
Take the case of an A.G. Edwards advisor who recently switched firms. He quickly narrowed his choices to just two brokerages: Wachovia Securities and Morgan Stanley. He didn't even bother to give the independent broker/dealer channel a second glance. And why would he? Morgan Stanley promised him more than 200 percent of trailing 12-months' production to join. (Granted, there are all kinds of strings attached to the upfront advance, but the deals are still attractive to many.)
Most independents cannot compete with such sign-on bonuses and forgivable loans, since independent b/d net profit margins are so much skimpier. Some industry consultants wonder if the so-called wave of advisors going independent won't slow to a trickle, since it seems the average wirehouse advisors are the ones “making bank,” as one advisor put it. (Smith Barney — which doesn't offer the same kinds of aggressive signing bonuses as Morgan Stanley — says it lost just 30 FAs last year to independent b/ds and RIAs; those departing FAs averaged gross production of less than $300,000.)
Chip Roame, managing principal of research and consulting firm Tiburon Strategic Advisors, says, “The wirehouse channel is by far the most well-established channel. In any market where one channel has been in existence longer, it will have better producers.”
Dennis Gallant, principal of financial services consulting firm Gallant Distribution Consulting, says that wirehouse infrastructure generally offers more capabilities with a broader set of services. “They're also more heavily focused on the affluent and mass affluent markets,” he says. Indeed, the survey finds that the average wirehouse advisor has $107.3 million in assets under management. Independent advisors average $44.4 million and “dually-registered” reps (Series 7 and registered advisor representatives or IARs) have $83.7 million in assets under management. (See chart on page 40.)
But, again, the average dually-registered IAR isn't the one that's taking home the most pay in the RIA channel. It's only those who own an independent b/d or RIA firm, rather than those who are employees of the independent firms. “Advisors make a lot of money in equity when they own a business because they control their own expenses,” Grist says. But even firm principals say it's important to recognize when re-investing in the firm is more important than pocketing the profit. “It's disadvantageous if you strip money out of your firm each year and don't re-invest. You'll definitely run into trouble if you want to keep delivering great service to your clients,” Itzoe says. Within the next 12 months, the partners of Greenspring Wealth Management expect to be at full client capacity; instead of taking extra compensation from profits this year, the firm plans on hiring a full-time employee to take on some client responsibility.
Itzoe and Collins are in the midst of determining what portion of their profit will be allocated for re-investment in the firm each year. “We are looking to really re-invest by bringing people on to support our growth in the client base. It's a good dilemma to have,” Itzoe says.
A Wirehouse Start
Independent advisors tend to have at least one thing in common: a wirehouse background. That background, some say, is a key step the road to becoming a successful business owner. “Former wirehouse advisors who are now business owners run a more efficient practice,” Grist says. “At their old firms, they were beaten up by management for anything that went wrong.” They end up bringing that mentality with them to their own firm, he says. Collins admits that the sales and marketing training he received at Merrill Lynch has helped in managing his RIA. “Overall, [the experience at Merrill Lynch] was a good thing, because it was so focused on sales and marketing, which now helps us from a client-account standpoint. It helps the RIA grow,” Collins says.
Grist says the wirehouses are the right place to start a career in financial services. The large national firms are able to train large groups of “freshmen” and help them develop books of business. “It makes sense to be at a wirehouse early in the advisor's career. Once you have a client book and an experience you're comfortable with, then you're just a tax to your firm for stuff you can do on your own. Why stay?” he asks. (Wirehouse management contends that you have lots of reasons to stay: support, fuller investment platform, a national brand and a team of experts to help individual FAs meet the needs of almost any kind of client.)
Andre Cappon, president of The CBM Group, a New York-based consultant, says joining an independent firm as a sole practitioner is probably less lucrative than joining with a team. So if you're growing a book of business at a wirehouse before making the leap, you might also want to consider building a team of your own. “If you have 10 advisors working for you, you're getting a split of what they bring in. And, as a practice principal, you decide how much they get paid,” Cappon says.
The good news for advisors who are looking to take on an ownership role is that the independent b/ds have made efforts to make the transition to independence easy. Many of them have developed “transitional services” where a team of experts helps new independent reps launch their business. Some firms offer financial assistance (loans, small sign-on bonuses) that can be used as a down payment for office space.
Bill McGovern, a former business development executive for Raymond James Financial Services, who now operates the consulting firm B/D Search in St. Petersburgh, Fla., says, “The playing field between wirehouse and independent firms is becoming more level in product, service and technology offerings. It's getting to the point where an independent firm can offer reps as much technology as in any other channel, and the ability to provide any kind of business he needs.”
In fact, besides compensation, reps across all channels said the most valuable resource their firms provide is technology. About 55 percent of wirehouse respondents say technology is what they consider the most valuable factor to their practice. And more than half, or 68 percent, of independent reps say the same. McGovern says that's no surprise. “More advisors are asking what kind of technology a firm can provide so they can operate more efficiently.”
However, Grist says there are wirehouse advisors that will never consider going independent. They are comfortable in the wirehouse environment. “They say, ‘I'm making enough money. So why go through the effort of moving my entire practice?’ These are the guys making half-a-million dollars a year working 25 hours a week and they're not interested in running a business.”
Profile of the Typical Advisor
From the Registered Rep. 2007 Compensation Survey
Age: 46
Sex: 84% male
Education: 57% have Bachelors Degrees: 25% have graduate degrees; 19% have advanced professional qualifications (CFP, ChFC/CLU or CFA)
Years in the Business: 15
Assets Under Management (AUM): median $52.6 million, mean $82.2 million
Gross Production: median $334,615, mean $467,434
Payout: median 44.8%, mean 53.7%
Compensation (Including commissions, fees, deferred-comp, bonus): median $165,853, mean $216,963
Length of Service: 67% have been at the same firm for the last five years
Mean Assets Under Management: $82.2 million
| $ in Millions | Total | Wirehouse | Regional | IBD | Dually-Registered (RIA) | Bank Brokerage/Bank Trust | Other |
|---|---|---|---|---|---|---|---|
| Less than $10 | 15.1% | 7.4% | 16.1% | 17.8% | 21.4% | 18.6% | 35.5% |
| $10 to $49.9 | 31.8 | 24.9 | 25.0 | 51.1 | 37.5 | 18.6 | 38.7 |
| $50 to $59.9 | 9 | 6.9 | 19.6 | 7.8 | 1.8 | 16.3 | 9.7 |
| $60 to $69.9 | 5.4 | 5.8 | 3.6 | 3.3 | 8.9 | 9.3 | 0 |
| $70 to $79.9 | 4.5 | 5.3 | 3.6 | 4.4 | 0 | 9.3 | 3.2 |
| $80 to $89.9 | 4.3 | 6.3 | 3.6 | 4.4 | 3.6 | 0 | 0 |
| $90 to $99.9 | 2.6 | 3.2 | 0 | 2.2 | 3.6 | 4.7 | 0 |
| $100 to $124.9 | 6.5 | 10.6 | 3.6 | 1.1 | 5.4 | 7.0 | 3.2 |
| $125 to $149.9 | 5.2 | 7.4 | 3.6 | 5.6 | 0 | 2.3 | 6.5 |
| $150 to $174.9 | 2.6 | 3.2 | 5.4 | 2.2 | 0 | 2.3 | 0 |
| $175 to $199.9 | 1.7 | 2.6 | 3.6 | 0 | 1.8 | 0 | 0 |
| $200 to $299.9 | 4.1 | 5.8 | 3.6 | 0 | 5.4 | 4.7 | 3.2 |
| $300 to $399.9 | 2.4 | 3.7 | 1.8 | 0 | 3.6 | 2.3 | 0 |
| $400 or more | 3.0 | 4.2 | 3.6 | 0 | 5.4 | 2.3 | 0 |
| Estimated Mean | 82.2 | 107.3 | 83.9 | 44.4 | 83.7 | 78.6 | 41.7 |
| Estimated Median | 52.6 | 78 | 54.5 | 36.1 | 40.5 | 58.6 | 26.7 |
Mean Gross Production: $467,434
| $ in Millions | Total | Wirehouse | Regional | IBD | Dually-Registered (RIA) | Bank Brokerage/Bank Trust | Other |
|---|---|---|---|---|---|---|---|
| Less than $100,000 | 16.8 | 10.6 | 10.7 | 16.7 | 30.4 | 14 | 45.2 |
| $100,000-$149,000 | 8.2 | 5.8 | 5.4 | 15.6 | 8.9 | 4.7 | 9.7 |
| $150,000-$199,999 | 7.1 | 7.4 | 5.4 | 10 | 5.4 | 4.7 | 6.5 |
| $200,000-$249,999 | 6.2 | 3.2 | 8.9 | 13.3 | 5.4 | 4.7 | 3.2 |
| $250,000-$299,999 | 7.1 | 9.0 | 14.3 | 5.6 | 0 | 4.7 | 3.2 |
| $300,000-$349,999 | 5.6 | 4.2 | 10.7 | 10 | 3.6 | 2.3 | 0 |
| $350,000-$399,999 | 5.6 | 3.7 | 3.6 | 7.8 | 7.1 | 9.3 | 6.5 |
| $400,000-$449,999 | 5.8 | 4.8 | 3.6 | 3.3 | 12.5 | 14 | 0 |
| $450,000-$499,999 | 3.9 | 5.8 | 3.6 | 0 | 3.6 | 7.0 | 0 |
| $500,000-$549,999 | 5.2 | 6.3 | 5.4 | 2.2 | 1.8 | 9.3 | 6.5 |
| $550,000-$599,999 | 3.0 | 3.2 | 7.1 | 0 | 1.8 | 4.7 | 3.2 |
| $600,000-$649,000 | 3.0 | 4.8 | 1.8 | 3.3 | 0 | 2.3 | 0 |
| $650,000-$699,999 | 2.4 | 3.2 | 3.6 | 2.2 | 1.8 | 0 | 0 |
| $700,000-$749,000 | 1.7 | 2.6 | 0 | 0 | 7.0 | 0 | 0 |
| $750,000-$799,999 | 1.9 | 3.7 | 1.8 | 1.1 | 0 | 0 | 0 |
| $800,000-$849,999 | 1.5 | 2.1 | 1.8 | 0 | 1.8 | 0 | 3.2 |
| $850,000-$899,999 | 1.1 | 1.6 | 0 | 1.1 | 1.8 | 0 | 0 |
| $900,000-$949,999 | 0.6 | 0.5 | 0 | 2.2 | 0 | 0 | 0 |
| $950,000-$999,999 | 1.1 | 1.6 | 0 | 0 | 1.8 | 2.3 | 0 |
| $1M- $1,999,999 | 8.0 | 11.6 | 7.1 | 4.4 | 7.1 | 7.0 | 0 |
| $2 million or more | 2.4 | 1.6 | 1.8 | 1.1 | 3.6 | 2.3 | 9.7 |
Total Compensation (including fees, commissions, deferred compensation and bonus) by Firm Type
| $ in Millions | Total | Wirehouse | Regional | IBD | Dually-Registered (RIA) | Bank Brokerage/Bank Trust | Other |
|---|---|---|---|---|---|---|---|
| Estimated Mean | $216,963 | $243,825 | $176,182 | $219,111 | $209,464 | $166,071 | $206,667 |
| Estimated Media | $165,583 | $199,999 | $140,908 | $181,818 | $162,500 | $136,666 | $112,500 |
Compensation By Job Function
| $ In Millions | Total | Practice Principal/Owner | Senior Advisor | Junior Advisor | Other |
|---|---|---|---|---|---|
| Estimated Mean | $216,963 | $265,874 | $235,590 | $76,098 | $130,833 |
| Estimated Median | $165,853 | $233,333 | $201,852 | $66,400 | $97,390 |
Compensation By Fiduciary Status
| Total | Always | Sometimes | Never | |
|---|---|---|---|---|
| Estimated Mean | $216,963 | $183,972 | $221,835 | $239,629 |
| Estimated Median | $165,853 | $125,000 | $175,000 | $202,500 |
Compensation By Service Offered
| $ in Millions | Asset management using 3rd party managers and mutual funds | Investment management using individual securities-fee-based | Financial planning — fee-based or mix of fee and commission | Investment management — mix of fee and commission | Asset management — mix of fee and commission | Brokerage services — commission only |
|---|---|---|---|---|---|---|
| Less than $20,000 | 0% | 0% | 2.9% | 2.1% | 1.7% | 6.3% |
| $20,000-$39,999 | 2.3 | 4.5 | 6.6 | 4.2 | 1.7 | 0 |
| $40,000-$99,999 | 16.1 | 22.7 | 23.4 | 20.8 | 29.3 | 30.2 |
| $100,000-$149,999 | 13.8 | 4.5 | 16.1 | 18.8 | 13.8 | 28.6 |
| $150,000-$199,999 | 12.6 | 18.2 | 7.3 | 9.4 | 10.3 | 1.6 |
| $200,000-$249,999 | 10.3 | 18.2 | 5.1 | 13.5 | 8.6 | 7.9 |
| $250,000-$299,999 | 10.3 | 4.5 | 11.7 | 6.3 | 10.3 | 3.2 |
| $300,000-$399,999 | 8.0 | 13.6 | 12.4 | 9.4 | 6.9 | 6.3 |
| $400,000-$499,999 | 11.5 | 0 | 5.1 | 7.3 | 6.9 | 7.9 |
| $500,000-$599,999 | 2.3 | 9.1 | 2.2 | 3.1 | 5.2 | 0 |
| $600,000 or more | 12.6 | 0 | 5.8 | 5.2 | 1.7 | 1.6 |
| Estimated Mean | $271,437 | $215,714 | $211,667 | $217,604 | $205,446 | $205,446 |
| Estimated Median | $222,777 | $199,999 | $155,000 | $177,777 | $166,666 | $119,444 |
Compensation vs. Average Payout
| Total | Less than 35% | 35% to 49.9% | 50% to 79.9% | 80% to 89.9% | 90% or more | |
|---|---|---|---|---|---|---|
| Less than $20,000 | 2.4% | 5.1% | 1.0% | 6.8% | 0% | 0% |
| $20,000-$39,999 | 3.9 | 7.6 | 2.6 | 5.5 | 1.7 | 2.0 |
| $40,000-$99,999 | 23.2 | 46.8 | 16.4 | 27.4 | 18.3 | 10.2 |
| $100,00-$149,999 | 17 | 25.3 | 15.9 | 16.4 | 18.3 | 8.2 |
| $150,000-$199,999 | 8.8 | 3.8 | 10.8 | 9.6 | 11.7 | 6.1 |
| $200,000-$249,999 | 9.2 | 3.8 | 13.3 | 6.8 | 8.3 | 8.2 |
| $250,000-$299,999 | 8.6 | 3.8 | 9.7 | 4.1 | 13.3 | 14.3 |
| $300,000-$399,999 | 9.5 | 0 | 11.3 | 5.5 | 11.7 | 22.4 |
| $400,000-$499,999 | 7.1 | 1.3 | 9.2 | 6.8 | 6.7 | 10.2 |
| $500,000-$599,999 | 2.8 | 0 | 2.6 | 4.1 | 5.0 | 4.1 |
| $600,00 or more | 5.6 | 0 | 5.6 | 6.8 | 5.0 | 14.3 |
| Estimated Mean | $216,963 | $101,104 | $240,547 | $199,247 | $240,417 | $318,980 |
| Estimated Median | $165,853 | $87,026 | $211,538 | $133,333 | $210,000 | $309,091 |
How This Survey Was Conducted
In March 2007, Registered Rep. invited over 12,000 of its subscribers, including reps, branch managers, chairmen, CEOs, presidents and financial planners, to participate in an online survey about advisor compensation. There was a response rate of 3.6 percent, or 465 respondents.